Here’s how the Fed (and others) will drive gold to $1,700

Expect Apple to grab plenty of attention this morning. Shares are down 2% in premarket, after EU officials told Ireland to send the iPhone maker a $14.5 billion demand for taxes it sidestepped under a deal with the Emerald Isles. And it seems Apple isn’t the only one potentially in the muck.

But far and away from tax blues, for you Fed junkies, your fix is in. Fed Vice Chairman Stanley Fischer said in an interview this morning that you can’t say “one and done” when it comes to U.S. interest rates, and that hikes will depend on the data.

Stocks are so far not showing too much reaction, so another win for Wall Street Tuesday is up in the air. But the word Monday was that the market is warming up and getting used to the idea of a rate increase.

That crashes nicely into our call of the day, which says investors should just stop getting sucked into faux hawkishness from the Fed. That means keep buying one particular asset, say Morgan Stanley analysts.

“While we understand the fear of rising rates, we also understand the opportunity it presents to investors with cooler heads,” they say. Read below for more.

Our chart of the day looks at the relationship between gold and central-bank balance sheets, which could mean the precious metal isn't priced nearly as high as it should be.

The call

Enough with the post-Wyoming hand-wringing—it is time to call the Fed’s bluff, say Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra.

“Apart from one voice causing commotion, we found little at Jackson Hole to sway our view on the U.S. Treasury market,” the strategists told clients in a note late Monday. “While August payrolls present an obvious risk, we continue to believe market implied probabilities for a September rate increase will end at zero, not 100. Remain long UST 5-year notes.”

They say yields have been rising since Fed Vice Chairman Fischer toyed with the idea of a rate-hike in September and December, speaking last week in a CNBC interview. (Blame the messenger, who happens to be speaking again this morning.)

“He was responding to a question worded in such a way that the response sounded less like hypothesis and more like policy,” say the strategists.

The chart

Based on a theory from Deutsche Bank analysts, gold should be trading around $1,700 an ounce.

“Let us be clear; we are not saying that gold will trade up to $1,700/oz in the near term, but when viewed against the aggregated balance sheet of the ‘big four’ global central banks (the Fed, ECB, BoJ and PBOC), the argument can be made if we view gold as a currency, the metal is worth closer to $1,700/oz, versus the spot price of $1,326/oz,” Michael Hsueh and Grant Sporre told clients.

They explain that central-bank balance sheets have expanded by 300% since the start of 2005, while aboveground stocks of gold have risen by 19% in tonnage terms or around 200% in value terms.

“If we were to assume that the value of gold should appreciate to keep the overall value of the big four aggregate balance sheet equivalent to that of the value of the aboveground gold stocks, then gold should be trading closer to $1,700/oz,” the analysts said in a note Friday. Here’s their chart:

That relationship has broken down a couple of times in history—once during the global financial crisis and once in April 2013, when the Fed said it was quitting quantitative easing. But as long as those balance sheets expand, gold should keep some momentum, say the analysts.

The rate of gold-price appreciation will slow, as momentum has so far outpaced that of central bank expansion, they add.

Piper Jaffray’s Gene Munster says own Apple stock for two reasons: the chance of a positive surprise from iPhone 7 driving growth above the iPhone 6 level, and a “supercycle.” He’s targeting $151 for shares with an overweight rating.

The quote

Reuters

Lowering the boom

“In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003, down to 0.005% in 2014.” — That was EU Competition commissioner Margrethe Vestager this morning, handing down that Apple verdict.

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